### 5.4 Social Security & Payroll Taxes

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• Math Help

To calculate the employee's federal income tax in Example 2(b), first calculate the employee's taxable income. (This assumes the employee is single, does not have any other taxable income, and claims the standard deduction.)

So, the taxable income is \$48,600. Using the table on page 212 and a spreadsheet, you can calculate the federal income tax owed by the employee as shown.

So, the employee in Example 2 owes \$8331.25 in federal income taxes.

To calculate the employee's state income tax, first note that Massachusetts has a personal exemption of \$4400 and does not tax employee 401(k) deferrals. So, with respect to state income taxes, the employee's taxable income is

Because Massachusetts has a flat income tax rate of 5.3%, you can calculate the state income tax owed by the employee as shown. (Note that in decimal form the tax rate is 0.053.)

So, the employee in Example 2 owes \$2838.15 in state income taxes.

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• Checkpoint Solution

c. Divide the total compensation package by twelve to find how much the employer pays each month.

The employer pays \$6729.92 each month.

d. The employee takes home \$42,114.10 each year.

The employee takes home \$3509.51 each month.

Most employees do not understand the actual costs of their total compensation package. On the other hand, most employers do not adequately communicate to employees the cost of the benefits they provide. If both parties are fully aware of the actual costs and take-home pay, they may gain a mutual respect for each other's situation and use this knowledge to reach fair compensation levels in future negotiations.

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